A policy requiring appropriate documentation and quality assurance  would help Treasury ensure that analytical methods, data, assumptions,  limitations, and uncertainties are transparent, appropriate, and available  to future model developers and users.. Bilateral market outreach.. Consequently, interest rates for these securities increased dramatically  and liquidity declined in the secondary market where securities are traded  among investors.. It does  not, however, have policies governing important aspects of two of these  inputs: bilateral market outreach and analytical modeling.. Key Characteristics of Treasury Securities Support Reliable Demand but Changes in Policies or Market Conditions Pose Risks Low Risk and the Ability to Easily Buy and Sell Large Volumes of Treasury Securities Support Reliable, Broad-Based Demand

The combination of the liquidity, depth, and safety of the Treasury market  is unmatched in global markets.. Market Outreach and Analysis Inform Treasury Debt Issuance Decisions but Policies Governing Key Inputs Could Be Strengthened

Treasury must regularly make important debt issuance decisions—such  as what type of Treasury security to issue and in what quantities—to  maintain broad-based demand and support its goal of borrowing at the  lowest cost over time.. Market participants and subject matter experts we interviewed and  surveyed identified liquidity, depth, and safety as the most important  characteristics of Treasury securities.. Market participants we interviewed and surveyed across  various sectors have raised concerns about risks that could affect  demand for Treasury securities: risks from a future debt limit impasse, the  sustainability of the federal debt, the dollar’s status as the primary reserve  currency, and changes in the structure of the market which might affect  liquidity, all of which could degrade the unique advantages of the  Treasury market.. Over the last 10 years, debt held by the public has more than doubled;  increasing from about $7 trillion in 2009 to $16 trillion in 2019.. Overall, these  reforms increased demand from large banking institutions for Treasury  securities.. Such a shift  would likely reduce foreign official holdings of Treasury securities and  could potentially reduce demand from other sectors that use U.S. dollars  for global trade and other transactions.. The Treasury Market Has a Diverse Investor Base

Treasury securities are held by a wide range of investors for a variety of  different reasons, including cash and liquidity management, collateral,  hedging, speculation, arbitrage, and as long-term “buy and hold”  investments.. Therefore, it is important  that Treasury make these decisions based on the best information  possible.. These characteristics make Treasury  securities a unique and critical asset for a broad range of investors.. These issues arise in part because Treasury does not have a policy  governing important aspects of the Office of Debt Management’s  analytical modeling activities, including requiring that analyses are  documented and that Treasury staff follow and document appropriate  quality assurance steps.. This could further increase yields and therefore  costs to Treasury.. Treasury Borrowing Advisory Committee (TBAC).. Treasury also analyzes more  granular data on bidders that are not publicly available.. Treasury has a critical role to play through its management of the federal  debt portfolio to support its goal to borrow at the lowest cost over time.. Treasury officials told us that they rely on  three key inputs to help analyze financing options and inform these  decisions: (1) market outreach, (2) auction and market metrics, and (3)  analytical models.
Why GAO Did This Study

The Congressional Budget Office projects that federal deficits will reach $1 trillion in 2020 and average $1.2 trillion per year through 2029, further adding to the more than $16 trillion in current debt held by the public. As a result, Treasury will need to issue a substantial amount of debt to finance government operations and refinance maturing debt. To support its goal to borrow at the lowest cost over time, Treasury must maintain strong demand from a diverse group of investors for Treasury securities.
GAO prepared this report as part of continuing efforts to assist Congress in identifying and addressing debt management challenges. This report (1) identifies factors that affect demand for Treasury securities and (2) examines how Treasury monitors and analyzes information about the Treasury market to inform its debt issuance strategy.
GAO analyzed data on investor holdings of Treasury securities; surveyed a non-generalizable sample of 109 large domestic institutional investors across 10 sectors (67 responded); reviewed Treasury analysis and market research; and interviewed market participants across sectors, experts on foreign investors, and Treasury officials.

What GAO Found

The large institutional investors GAO surveyed across multiple sectors identified liquidity, depth, and safety as the most important characteristics of Treasury securities. This combination supports reliable demand from different types of investors through changing market conditions. Many investors accept low yields because of these characteristics, keeping the Department of the Treasury's (Treasury) borrowing costs low.
Market participants GAO interviewed and surveyed identified risks that could degrade these key characteristics and reduce future demand:
Debt limit impasses could force Treasury to delay payments on maturing securities and interest, until sufficient funds are available, compromising the safety of Treasury securities.
Unsustainable levels of federal debt could cause investors to demand a risk premium and seek out alternatives to Treasury securities.
A reduced role for the U.S. dollar as the dominant reserve currency could diminish the advantages of holding Treasury securities for foreign investors, particularly foreign government investors who hold large amounts of dollar-denominated assets to assist in managing their exchange rates.
Changes in the Treasury secondary market where securities are traded— including high-frequency trading and a reduced role for broker-dealers who buy and sell for customers—could increase volatility and reduce liquidity.
Treasury regularly makes important issuance decisions—such as what types of securities to issue and in what quantities—to maintain broad-based demand and support its goal of borrowing at the lowest cost over time. Treasury officials said three key inputs support these decisions: market outreach; auction and market metrics (e.g., trading volumes); and analytical models .
However, Treasury has not finalized its policy for systematically conducting bilateral market outreach to ensure a thorough understanding of market demand. Treasury also does not have a policy governing important aspects of its analytical modeling, including following and documenting quality assurance steps to ensure that analytical methods are appropriate and available to future model developers and users. Codifying policies governing key information sources would help ensure that Treasury's decisions are based on the best possible information.

What GAO Recommends

GAO recommends that Treasury (1) finalize its policy for conducting bilateral market outreach and (2) establish a policy for the documentation and quality assurance of analytical models.
Treasury agreed with these recommendations.